2008 Review

2008: One for the record books

Every now and again in life you find yourself in the midst of a whirlwind, and by the time you get a chance to look up, things have changed so drastically that you wonder “what-on-earth-has happened?”  The first time I ever experienced this I was 18 years old.  I had enlisted in the Marine Corps and before I knew it I was in a big room on a small island off the South Carolina coast with 60 other guys and a bunch of very angry strangers throwing things, yelling at us, and presumably bent on our personal destruction.  As I took in all of the chaos going on around me I realized it was difficult to remember exactly how I got here…I knew there was a plane, a bus, a few beers and a signature involved, but so many big things had happened in the interim that I had some difficulty remembering the details. 

That scenario reminds me a bit of year-end 2008.  I see a lot of crazy things going on around me, everything seems to have changed…but where did all of this start?  More importantly…where will it stop?

The sheer volume of activity that 2008 has brought us is compelling me to write two year-end reviews; one review will be fairly short and entertaining, the other will be longer, more detailed , and hopefully just as entertaining.  With that in mind, if you don’t have the time or desire to get bogged down in the details just hit this first part.  The rest of you can read both parts.

If we had to sum up 2008 in just a few short words I can think of none that are more appropriate than “systemic risk”.

The short story of 2008

Suppose that on December 01, 2007 you got a concussion that put you in a coma for a year and you awoke on January 01, 2009.  Upon awakening you would be hard pressed to recognize this market.

Picture a banker that after a year, escapes this coma, squares himself away and gets in to the office to catch up on things.  The first thing he sees is a mountain of cash in Fed Funds Sold.  “How did we get all of this cash?” he yells to his assistant.  The assistant dutifully informs him that everything that could be called has been called or is about to be called.

“Whew…well at least we’re getting 4.25% on it” says the banker.

“no boss…the Fed cut rates.”

“So we’re getting 4.00%?” our banker inquires.

“no boss, they cut more than once.”

“We’ve got this much money in Fed Funds sold at 3.75% !?!?!?” the bankers exclaims.

“no boss, we’ve got that much money sold at zero percent.  The Fed cut 425 basis points since last December.”

“We can’t have that…let’s get this money into some 1-month and 3-month T-bills to get some yield until we get a game plan together.”

“boss…t-bills are trading at negative yields.”

“You know that we’ve got a random drug test policy at this bank right?  Do I need to randomly test you right now?  Because I thought I heard you tell me that Treasury bills are trading at negative yields…did you start smoking dope while I was in the hospital?”

“no boss…just telling you the facts.  T-bills are trading with negative yields…we’re better off at zero percent on Fed Funds sold.”

 In shock he declares “OK, I’d better call one of our approved brokers and get this money put to work.  Get our guys from Bear Stearns, Lehman, and Merrill on the phone and see what they can show us.  Right before my coma they showed me a 15 year 5.00% MBS at a discount to yield 5.08%...call him and see if there’s any left!”

His assistant now explains that those firms don’t exist anymore…and that the bond to which he is referring is now trading north of 103 to yield a 3.35%.

“Ha!  Good one…you almost had me on that joke.  Now get Bear on the horn.” 

Drawing a blank stare from his assistant it slowly dawns on our banker that this isn’t a joke...every firm on his approved list really is gone…bankrupt…history…sayonara. 

“At least we’ve still got the old independent street firms like Goldman and Morgan Stanley right?” he asks cautiously. 

“Those are now banks sir…and I might as well tell you that Fannie and Freddie are in conservatorship, money market funds are guaranteed, Wachovia is gone, WaMu is gone, Indymac is history, there now exist corporate bonds that carry the full faith and credit guaranty of the US Treasury, the government is actively injecting capital into banks around the country, GM and Chrysler are on the rocks (but the government is going to use money set aside for the financial bailout to help the automakers), the FDIC’s problem bank list is almost at 120 institutions, most of the world’s major economies are in recession, and the government is fighting to keep another great depression from happening, our board meeting is this Wednesday, the FDIC will be here on Monday…and when you get a chance you’ve got 12,000 e-mails to follow up on.”

After a few moments of stunned silence our man responds “thank goodness I put all my money with Bernie Madoff right before the accident…he always cranks out an 8 to 12 percent return.”

With that, the assistant walks away. 

 

Here is a whirlwind tour of 2008 for those that appreciate brevity:

Emergency 75 bps Rate cut by Fed in Jan, One week later Fed cuts another 50 bps

Volatility in stocks and bonds

Banks around the world eat $1 Trillion in credit write-downs and losses since start of credit crisis in ‘07

Fannie and Freddie suffer quarter after quarter of multi-billion dollar losses before being taken into conservatorship

More volatility, Feds take over a bunch of banks

JP Morgan buys Bear, B of A buys Countrywide, B of A buys Merrill, JP Morgan buys parts of WaMu

Citi buys Wachovia, Wells steals Wachovia, nobody buys Lehman, systemic risk runs amuck

More volatility, Libor out of control, money market run, money markets govt. guaranteed

Everyone on the planet throws trillions of dollars at Libor, Libor doesn’t budge

Banks fear lending, Governments fear banks not lending

Bailouts for everyone, Its official….US Recession, Most major economies slip into recession

Holiday retail numbers are poor, GM and Chrysler get government help, everyone else lines up for a handout, get in line folks everyone’s doin’ it.

Bernanke tells us we’re going to be in a low rate environment for quite some time.

That’s the short story.